Greenspan Says Stocks Will Decline After S&P U.S. Rating Cut

Alan Greenspan, former chairman of the U.S. Federal Reserve, speaks at the Brookings Institution's forum on restructuring the U.S. residential mortgage market in Washington, D.C., on Feb. 11, 2011. Photographer: Andrew Harrer/Bloomberg

Aug. 7 (Bloomberg) -- Former Federal Reserve Chairman Alan
Greenspan said he expects stocks to continue their decline after
Standard & Poor’s downgraded the nation’s credit rating, even as
an S&P official predicted little market impact.

“Considering the momentum in which the market went down
over the last week, it is very unlikely, if history is any
guide, that this isn’t going to take a while to bottom out,”
Greenspan said on NBC’s “Meet the Press” program. “So the
initial reaction in my judgment is going to be negative.”

The Aug. 5 downgrade followed the biggest weekly selloff in
U.S. stocks in 32 months, with the S&P 500 Index slumping 7.2
percent to its lowest level since November. S&P’s managing
director of sovereign ratings, David Beers, said he doesn’t
expect markets to react significantly when they open tomorrow.

“Based on historical experience, we wouldn’t expect that
much financial impact,” Beers said today on the “Fox News
Sunday” program. “The markets are reacting to a lot of
factors, not just what S&P said on Friday.”

Greenspan said U.S. government bonds are safe investments.
“Very much so,” he said. At the same time the S&P downgrade,
which stemmed from the political clash over the debt limit,
“hit a nerve that there’s something basically bad going on,”
Greenspan said.

Seeking a Haven

Investors seeking a haven amid concerns the global economic
rebound is fading have bought Treasuries in recent weeks, even
after S&P warned it might lower the U.S. rating. Yields on
benchmark 10-year notes closed at 2.56 percent Aug. 5, before
S&P announced its decision, down from 3.12 percent a month ago.

The dollar weakened against the euro and yen and dropped to
a record versus the Swiss franc in early Asia-Pacific trading
following the S&P downgrade. The dollar fell to 77.70 yen, from
78.40 on Aug. 5. The U.S. currency depreciated to $1.4357 to the
euro, from $1.4282. The dollar touched 74.85 Swiss centimes
before trading at 75.16, from 76.74 last week.

Greenspan predicted the economic slowdown would stop short
of becoming a new recession. “I don’t see a double dip but I do
see it slowing down,” Greenspan said.

The U.S. Treasury Department says S&P made a $2 trillion
mistake in its calculations. The department said in a statement
that “there is no justifiable rationale” for the move.

S&P isn’t ruling out the possibility of a second downgrade.
The company has a “negative outlook” on the U.S., signifying a
one-in-three chance of a cut in the next six to 24 months, John
Chambers, chairman of S&P’s sovereign debt committee, said on
ABC’s “This Week.”

Another Downgrade?

“If the fiscal position of the United States deteriorates
further, or if the political gridlock becomes more entrenched,
then that could lead to a downgrade,” Chambers said.

Two other ratings companies, Moody’s Investors Service and
Fitch Ratings, affirmed their AAA credit ratings for the U.S. on
Aug. 2, the day Obama signed a bill that ended the debt-ceiling
impasse. Moody’s and Fitch both said downgrades were possible if
lawmakers fail to enact debt reduction measures and the economy
weakens.

Austan Goolsbee, who stepped down last week as chairman of
President Barack Obama’s Council of Economic Advisers, said on
NBC’s “Meet the Press” that the conflict over the federal
deficit was threatening to divert attention from sagging
economic growth.

“There is a danger that if we just keep saying the number
one thing we have to talk about is all about the short run
deficit, we are losing sight of the fact that we’ve got to
reignite the engine of job growth,” said Goolsbee, who is
returning to his teaching position at the University of Chicago.

‘Tea Party Downgrade’

Lawrence Summers, former top economic adviser to President
Obama, called S&P’s downgrade from AAA to AA+ “outrageous” on
CNN’s “State of the Union” and said that American families
“are going to be the losers” because House Republicans
“played chicken with America’s creditworthiness.”

Democratic and Republican lawmakers traded blame for both
the debt and the downgrade.

Democratic Senator John Kerry of Massachusetts said blame
lay with the Tea Party movement and the House Republicans who he
said were willing to let the nation default rather than consider
a budget compromise.

“This is the Tea Party downgrade because a minority of
people in the House of Representatives countered even the will
of many Republicans in the United States Senate,” Kerry said.

U.S. Senator Lindsey Graham, a South Carolina Republican,
said Congress and the president would have avoided losing the
AAA credit rating had they listened to Tea Party Republicans and
passed $4 trillion in spending cuts.

“The Tea Party hasn’t destroyed Washington,” Graham said
on CBS’s “Face the Nation” program. “Washington was destroyed
before the Tea Party got there.”

Republican Senator John McCain of Arizona, who lost the
2008 presidential election to Democrat Barack Obama, said the
president had failed to offer a plan to lead the country out of
unsustainable budget deficits and debt.

“Don’t shoot the messenger,” McCain said. “Is there
anybody that believes that S&P is wrong in their assessment of
the fiscal situation of this country?”